An important type of pricing program used primarily by retailers is the loss leader. Under this method a product is intentionally sold at or below the cost the retailer pays to acquire the product from suppliers. The idea is that offering such a low price will entice a high level of customer traffic to visit a retailer’s store or website. The expectation is that customers will easily make up for the profit lost on the loss leader item by purchasing other items that are not following loss leader pricing. For instance, a convenience store may advertise a very low price for cups of coffee in order to generate traffic to the store with the hope that customers will purchase regularly priced products to go along with the coffee purchase.
Marketers should beware that some governmental agencies view loss leaders as a form of predatory pricing and thus consider it illegal. Predatory pricing occurs when an organization is deliberately selling products at or below cost with the intention of driving competitors out of business. Of course, this differs from our discussion which considers loss leader pricing as a form of promotion and not a form of anti-competitor activity. In the U.S. several state governments have passed laws under the heading Unfair Sales Act, which prohibits the selling of certain products below cost. The main intention of these laws is to protect small firms from below-cost pricing activities of larger companies. Some states place this restriction on specific product categories, such as gasoline and tobacco).